Friday, February 17, 2012

A Grecodorkian reviews "Greece's Odious Debt"

Book Review

Manolopoulos, J. (2011). Greece’s ‘odious’ debt: The looting of the Hellenic Republic by the euro, the political elite, and the investment community [Kindle version]. New York: Anthem Press. Retrieved from Amazon.com

This is a book about the ongoing financial collapse of Portugal, Ireland, Greece, Spain and Italy. It gives emphasis to current financial events in Greece and the resultant stress on the European Central Bank. The author, Jason Manolopoulos, has an interesting perspective as an investment industry executive from Canada working in London. The book frequently compares the financial situation in Greece with the financial collapse of Argentina ten years ago. He draws helpful historical comparisons with the current financial instability in Europe and offers psychological analysis behind the decisions leading to the present. Finally, the book sheds light on institutional corruption and clientelism that prevent government from making rational, clean decisions.

Mr. Manolopoulos lists Greece’s many problems. The Greek economy features high levels of public debt, a large trade deficit, undiversified industries, an overextended public sector, militant trade unions, widespread corruption, uneven payment of taxes, an overvalued currency, consumers expecting rising living standards, and a euro membership based on inaccurate data. In retrospect, it seems fantastic that the Greek economy was observed to be in better than average condition as late a February 2009. All parties involved are not looking very good as this story continues to evolve, including Greek politicians, Greek society, trade unions, leaders of the European Union, the IMF, and the world’s investment banks. All have exhibited a collective display of hubris, miscalculation, over ambition, deception, mis-selling and sheer greed.

Manolopoulos (2011) says that “Greece has been allowed to borrow in excess of €300 billion despite a largely unreformed economy, overreliance on mid-tech industries, a chronically inefficient and corrupt public sector, and an unreformed political infrastructure with immunity for politicians guilty of financial crimes” (p. 138). Mr. Manolopoulos would like to call this an “odious debt”, the term in international law that refers to a debt incurred by a despotic regime, but where is the despot? Mr. Manolopoulos doesn’t say. If we look at the recent history of Greece, we know that since 1987, the Greek financial sector has undergone almost complete liberalization (Thomadakis, p. 57). Since then, the Greek financial sector has shown positive performance and its modernization is obvious in the growth of skilled jobs in the banking sector. In a very real sense, the Greek state has failed the Greek banks rather than the other way around. Yet, Mr. Manolopoulos doesn’t make clear why Greece has yet to reform their economic system. Must the author be speaking of its lawless culture, starting with the grotesque waste in the public sector? Further development of the subject of Greek politics and society would help the book more useful in understanding how Greece in got into the mess in which it finds itself.

According to Mr. Manolopoulos, Greece’s application to join the euro in 2000 was motivated by what he calls the bogus concept of economic convergence. Although he doesn’t define what he means by economic convergence, it is an important concept because it is one of the crucial areas for European Union financial success. To call it bogus without saying why diminishes Mr. Manolopoulos’ message. By better defining the theory of economic convergence and what it means, the author would be in a better position to describe the economic reforms necessary for Greece. For example, the theory of convergence is the hypothesis that the states that poorer economies per capita incomes grow faster than richer economies. Yet, as we see historically, capital doesn’t flow from rich to poor countries (Lucas, 1990). This puzzle is famously called the “Lucas Paradox” but is not referred to by Mr. Manolopoulos in his book.

“The miraculous turnaround, in which Greece went from being an unconverged economy to a converged one within 18 months, should have raised alarm bells” (Manolopoulos, p. 1205). Yes, according to the idea of economic convergence a poor economy’s per capita income will tend to grow at faster rates than richer economies. Eventually, then, all economies should converge in terms of per capita income. The reason for this is because developing countries have the potential to grow faster than developed countries because of the law of diminishing returns. Obviously, the current situation in Greece proves the limitations of this idea.

Mr. Manolopoulos says that “Greece will not be transformed overnight from a low-tax, low-service society to a high-tax, high-service one like Sweden. There will be an inflection point, a dark moment before the dawn where taxes will have increased and services not improved. That will be a serious political testing point” (p. 4758). This is an excellent point. Looking back over one hundred years ago to the reign of Greece’s King George I, we see that the price Greece paid for a central government was clientelism and a network of patronage to local bosses in exchange for loyalty to the crown (Keridis, 1997). Greece’s military dictatorship fell in 1974, marking the end of a highly unstable history and the beginning of a parliamentary democracy. Though Greece has made tremendous progress since then, the fact is that its post-1974 democratically elected leaders initially postponed economic adjustment to an open, competitive economy (Tsoukalis, 1997). Knowing this, we begin to understand the challenges that will lead to an overhaul of Greece’s antiquated institutions that is still necessary. In fact, one could say the Greek financial crisis is the pressure for reform that Greece has been looking for since 1981 when it allowed entry into the European Community.

“The silver lining is the fact that the Greek public sector is wasteful, her tax payment irregular, and the private sector is uncompetitive means there is huge scope for improvement” (Manolopoulos, p. 4758). The problem with this argument is that since 1981, when Greece entered into the European Community, Greece has steadily lost socioeconomic ground because of structural weaknesses in its governance (Diamandouros, 1997). At a time when international and European environments were streamlining and privatizing, Greece found itself, and still finds itself hostage, to internal social and political forces that were pushing her in the opposite direction. That these problems still existed upon entrance into the European Union in 2000, and have not been rectified as of 2012 is something to be very concerned about next month (March, 2012) when Greece is due for its next round of funds from Brussels. In fact, at the end of 2011, the Organisation for Economic Co-operation and Development (OECD) found it striking that there was no central strategic and shared vision about where Greece was taking its society and economy (OECD, 2011).

As we are seeing in today’s financial news headlines, there has to be significant debt restructuring or else Greece must leave the EU. Why have we not learned our lessons? The orgy of debt continues. To continue to lend money to an economy that is losing money is simply unsustainable. Where does this leave the EU? There is fiscal union but not political union in the EU. For the EU to continue to exist, Greece will have to take orders from Brussels. Can Greek democracy survive under these stresses?

What is the path forward? While the thesis of “Greece’s Odious Debt” is a weak one, the book does a great job of directing attention to issues that created the financial crisis in Europe, especially in Greece. Are the Greeks of today remotely capable of coping with the financial realities of the modern world and the discipline of Eurozone members who are tiring of subsidizing unrealistic public expenditure and a robber baron attitude toward taxation?

Well that is the problem, with the book: It does not help us to know where we go from here. Clearly, Greek Prime Minister Lucas Papademos must secure a strong center and designate leadership that will take clear ownership of the reforms necessary. However, with a political system rooted in the politics of veto instead of the politics of persuasion, Mr. Papademos has an impossible task. It is understandable that “Greece’s Odious Debt” is challenged by the question of where Greece should go. Despite the emphasis of the book about lessons learned, Greece, unfortunately, is still in the early stages of this crisis, is in uncharted territory, and the outcome is very uncertain. In a very real sense, the Greek crisis has become an existential threat for the project of European integration begun with the Treaty of Rome over fifty years ago.

Manolopoulos, J. (2011). Greece’s ‘odious’ debt: The looting of the Hellenic Republic by the euro, the political elite, and the investment community [Kindle version]. New York: Anthem Press. Retrieved from Amazon.com